Monday, February 01, 2010

Real Consumption Growth Rate: Highest Since 2007

The chart above shows the annual percent change from the same month in the previous year for real personal consumption expenditures (data here) from January 1970 through December 2009, as reported in today's Personal Income report from the BEA. December was the third consecutive month of a positive growth rate for real personal consumption, and the growth has been positive in four out of the last five months. Further, the 1.77% growth rate in December was the largest monthly increase in real consumption since November 2007, the month before the recession officially started. Add this to the growing list of V-signs of economic recovery, and notice how it's similar to the V-patterns of recovery following recessions in 1975, 1980, 1982 and 1991. See Scott Grannis for more analysis on why this growth in real consumption is a positive indicator, and one that suggests that job growth will follow.

"Strip out inventories and the foreign trade sector, we see that domestic demand growth in the fourth quarter actually slowed to a paltry 1.7% annual rate from 2.3% in the third quarter. Some recovery. Based on some simulations we ran, demand growth with all the massive doses of fiscal and monetary stimulus should already be running in excess of a 10% annual rate. So, the real question that nobody seems to ask is why it is that underlying demand conditions are still so benign more than two years after the greatest stimulus of all time. The answer is that this epic credit collapse is a pervasive drain on spending and very likely has another five years to play out."

Morganovich, quality improvements are difficult to measure. In the 1970s, an automaker could add a (cheap) headrest, raise the auto price 2%, and raise wages 3% (2/3rds of production costs and 1% rise in real wages).

In the 2000s, a computer maker could improve processing speed 100%, cut its price 50%, sell 100% more computers, and real wages could be unchanged.

This implies that people don't spend as much because they get so much more for the money. BUT, there is a conundrum. Why does the Real Consumption show a 40 year down trend and the U.S. Personal Savings Rate Percent of Disposable Income (Carpe Diem) show a 25 year down trend at the same time? Saving and Consumption going down simultaneously may mean real wages have been going down or real living costs are higher then reported (shadowstats), correct?

Real Consumption is a component of GDP. China, for example, is a U.S. factory and imports subtract from GDP (the current account deficit was 6% of GDP recently, although now its 3%). Bargains induced Americans to spend rather than save.

Americans earn money creating, improving, and selling products, while our foreign partners produce them cheaply. If quality improvements were measured correctly, U.S. real wages increased, because inflation has been overstated (export-led economies made up in volume what they lost in value, while the U.S. made up in value what it lost in volume).